Perhaps Canada's best kept tax secret: the Private Health Services Plan. First introduced in 1989 by the Canada Revenue Agency, we take a look at one of the most advantageous (and least talked about) tools for a small business owner.
1. What is a Private Health Services Plan?
A Private Health Services Plan (PHSP) is a cost effective tax planning tool for small business owners in Canada. A PHSP enables small business owners to deduct family health and dental cost as a legitimate business expense. In some cases, writing off health and dental costrs can create substantial savings of more than 30% on all medical and dental related expenses.
2. You shouldn't establish and operate your own Private Health Services Plan
One of the most interesting questions that we've heard over the years — and we still hear it today — is “Can I set up a PHSP by myself?”
Although there is no specific CRA requirement for an arms-length administrator, it does not makes sense to administer your own plan.
At first glance a PHSP may seem rather easy and straight forward. This is far from true. There are many tax implications and insurance requirements that are implied, not stated, yet necessary. Using a qualified, professional third party administrator for your PHSP has the same advantages as using a professional accountant or lawyer.
3. Orthodontics, laser eye surgery, and chiropractors are 100% eligible
One of the most common things that we hear from small business owners is their frustration with insurance companies. You take your kids to the dentist, the dentist recommends $6,000 worth of teeth straightening technology, and as you gasp at the bill you are happy that you have “insurance to cover it”. After leaving the dental office, you speak with your insurance company and find out that only $1,500 of the braces will be covered, even though you've been paying premiums for years. Sound familiar?
This happens every day to small business owners and incorporated professionals across Canada. Health and dental insurance companies have been in the industry for so long that they understand the numbers and they know how to use them creatively. Dental insurance policies will typically have waiting periods, annual limits (especially on expensive dental procedures), and lifetime limits for things such as orthodontics (braces) where you really need the coverage. This is frustrating.
The great news is 100% of your expenses in these categories (and many others) are eligible within a PHSP.
4. Your dependants are eligible
At times there can be confusion as to exactly what constitutes a dependant for the purpose of a PHSP. Here is a reference for you to consider:
Dependants are defined as your legal spouse and unmarried, unemployed dependent children, including natural, adopted and step-children. Children of your common law spouse may also be considered an eligible dependant if living with the plan holder. In order to be considered an eligible dependant you must be claiming them on your personal income tax return.
Dependent children are eligible for benefits until the age of 21. Exceptions may be made in the case of full time students. If you declare a disabled or dependent adult on your personal income tax return, they may also be considered for eligibility.
5. Private Health Services Plans (PHSP) AKA Health Spending Accounts (HSA)
In an industry chalk full of acronyms and obscure terms, you can simplify matters in your head by equating a PHSP to a HSA. One could argue the HSA is a form of PHSP but for everyday conversation they are essentially the same thing. Here at Olympia we use the terms interchangeably, viewing Health Spending Account as a more marketable and customer friendly term.